Central banks could be forced to backstop crucial parts of the financial system that are vulnerable to higher interest rates, undermining their attempts to fight inflation, the Bank for International Settlements warned on Monday.
The BIS, dubbed the bank for central banks, said the crisis that unfolded in UK gilt markets in September underlined the risk that monetary authorities could be forced to inject liquidity into financial markets at a time when they are trying to rein in price pressures through higher interest rates and are shrinking their balance sheets.
The BIS said in its quarterly review that other large defined benefit pension systems were less vulnerable to fire sales than those in the UK, but that similar risks had built up in many parts of the non-bank financial sector during a long period of low interest rates. Since the 2008 global financial crisis, central banks have kept borrowing costs at historic lows and pumped trillions of dollars into the financial system through quantitative easing programmes. That has led investors to seek riskier returns.